Your Money.

Not An Open-and-shut Case

Bringing Individual Investors Into The Ipo Process Is An Uphill Battle For This Investment Banker

August 03, 2000|By Matt Marshall, Knight-Ridder/Tribune.

When investment banker William Hambrecht phoned Salon.com chief executive officer Michael O'Donnell last year and offered to take his company public, O'Donnell snapped up the opportunity.

O'Donnell needed to raise cash for his San Francisco-based on-line magazine, and Hambrecht seemed the perfect man to do it. Forbes magazine had put him on its cover, calling him an Internet visionary, and Hambrecht was offering a more profitable way to take his company public than the traditional investment banks.

"The industry was really upset. The press disparaged us, and the investment banking community dissed us," recalls O'Donnell. "Some said we went with Hambrecht because we couldn't get (investment bank) Goldman Sachs & Co."

A little more than a year after Hambrecht introduced his concept, he's still fighting an uphill battle. The logic of Hambrecht's method is compelling, at least in principle.

Figures show that individual investors are increasingly more active in owning new shares for the long-term. By allowing them in, Hambrecht ensures that the offering price is based on market demand and that a company gets a fairer price, not the artificially low one that he says is the result of the traditional IPO system. To top it off, Hambrecht charges companies fees of 5 percent of the proceeds raised, less than the 7 percent charged by other investment banks.

But few companies are jumping on the bandwagon. For many executives, Hambrecht's on-line firm doesn't have a solid enough track record.

While Hambrecht has been busy building up his network of distribution channels to reach more individual investors, he's had a more difficult time getting analysts to write reports about his companies.

Without that research, investors won't be familiar enough with them to invest.

"The open IPO is the wave of the future," says Craig Columbus, CEO of ScoreLab Inc., a company that tracks insider trading and that is looking to go public. "But there's one drawback: How do I get analyst coverage?"

Driving Hambrecht is his belief that the traditional IPO is unfair. He says investment bankers deliberately underprice an initial offering, as part of a ploy to produce a big jump in the share price. They then award the shares to their favorite institutional clients, guaranteeing them a profit, because they can "flip" them at a higher price after the IPO. In return for the favor, the clients are expected to redirect more of their brokerage business to the investment banks.

Meanwhile, individual investors who buy the stock after the IPO are left out in the cold, Hambrecht claims. "There's a real scam going on. It hurts the market in the long run. It's both unfair and destructive." he says.

That might sound strange coming from a man who earlier founded the well-known San Francisco investment bank Hambrecht & Quist, which takes companies public in the same traditional manner he now calls a "scam." But Hambrecht says he has changed his mind about the discount. For 25 years, he says, such a discount was justified as a legitimate way for a company to win a favorable reputation among underwriters. That way, the company could return to the market for a secondary round. But in the late 1990s, as the stock market heated up, the discounts started getting larger He founded his firm, WR Hambrecht plus Co., in 1998, after he resigned from his position as CEO of Hambrecht & Quist. He says he broke with H&Q because of his open IPO idea.

Now, he's being treated as an outcast. "Other investment banks act as though he's the anti-Christ," said Doug Atkin, CEO of Instinet, a major investor in WR Hambrecht. "They're making companies believe that this is a magical and mysterious process, and only they know how to do it."

Hambrecht has also had bad timing. After he took Salon.com public last June, its shares dropped about 80 percent, suffering the same negative market sentiment that has hit other Internet content companies. Before Salon.com, Hambrecht had taken public one other company, Ravenswood Winery Inc., of Sonoma, Calif. Neither that IPO, nor the two IPOs since Salon.com, Andover.net and Nogatech, have performed strongly, but that's partly because of the hit the high-tech market has taken since March.

Critics say Salon's woes are a sign the open IPO doesn't work. "The Salon example hasn't resonated well with most companies considering going public," says Scott Ryles, CEO of Epoch, an on-line investment bank that competes with Hambrecht by using a more traditional method.

But Hambrecht rejects the criticism: "Maybe (Salon) was a mistake," Hambrecht says in an interview. "Has the auction been a tough sell? Yes. But I think it's working fine."